By Enrique Benet Gregg
Although incorporating a corporation/company to establish and carry out commercial operations in Mexico is not required by law, doing so shields shareholders/partners from liability beyond their contributions. Additionally, administering and maintaining a business through a commercial Mexican subsidiary is often easier than through a representative office, branch, or permanent establishment, which are all susceptible to latent liability. In the case of trusts, the investor's obligations are mostly confined to complying with the trust's contractual conditions.
The aforementioned entities all have similar labor and tax implications. Two advantages corporations and companies have over other entities are the corporate veil and double taxation treaties.
While international investors are generally permitted to invest in the capital stock of Mexican legal corporations, many operations are subject to foreign investment restrictions or need approval by local authorities.
Foreign investors can conduct commercial activities and operations through a variety of different corporations, each with its own set of legal and tax implications.
Foreign investors should consider forming a company or partnership in Mexico, establishing a trust (fideicomiso), or establishing a representative office, branch, or permanent site in Mexico.
Limited liability corporations:
In Mexico, the limited liability stock corporation (Sociedad Anónima or "SA") and the limited liability company (Sociedad de Responsabillidad Limitada or "SRL"), as well as its variants, are the most common legal formations. The liability of foreign investors as shareholders/partners is limited to their capital contributions to the Mexican corporation/company through the formation of a SA or an SRL (corporate veil). Additionally, incorporating a corporation/company protects foreign investors' assets, streamlines financing, and provides unique tax benefits in the case of an SRL, as mentioned below.
Alternatives:
Another option for international investors is to establish a contractual entity, such as a trust. In Mexico, a settlor may transfer assets to a trustee, who will subsequently carry out the settlor's instructions for a beneficiary. In comparison to corporate and business duties, a trust provides more freedom. For example, corporations are immune from corporate compliance obligations that do not apply to trusts. A straightforward termination provision will also control the agreement's dissolution if the trust's participants so choose. A trustee is an unbiased individual who has fiduciary responsibility for the contract and is accountable for the trust's objectives.
However, depending on the scope of the trust's operations, it may qualify as a permanent establishment for tax purposes, so establishing the trust as a Mexican tax resident. Conducting business via a trust is further restricted by the trust's contractual conditions, which must be adhered to by the trust's partners, as well as by other regulatory and legal constraints.
The most often seen legal entity:
Limited liability companies (LLCs) are a special form of corporation that have limited liability (SA).
The S.A. must have a minimum of two shareholders but may have an unlimited number as established by its laws, which also specify the minimum capital stock. It is symbolized by shares, which may be transferred by endorsement.
The SA and businesses may implement a flexible capital system. This means that a business can have both fixed and variable capital stock, with the latter having the ability to increase or decrease without the need to amend the bylaws or register with public authorities (unlike the fixed capital stock).
The shareholder meeting is the governing body of the SA. According to the regulations, unanimous shareholder resolutions may be passed in lieu of a shareholder meeting provided all shareholders affirm the resolutions in writing. At least one shareholders' meeting must be held each year to vote on the company's financial statements, the nomination or confirmation of board members, and the payment of management salaries.
The SA may be governed by a single director or by a board of directors comprised of at least two directors.
Additionally, the statute requires the presence of a surveillance examiner (Comisario). One or more individuals supervise the management body's work (who do not have to be shareholders). The surveillance examiner may request financial information from the management body, review the business's books and records, make a report based on the information provided by the management body, and convene a shareholder meeting.
Corporation with Limited Liability (LLC) (SRL):
Equity quotas (not shares) are the SRL's non-documented equity contributions. Transferring stock quotas is accomplished by assignment (rather than endorsement) and must be approved by the company's majority of partners. The SRL is most frequently used in closely held firms where legislative elements such as supermajorities and stock transfer prohibitions are sought.
Like the SA, an SRL requires a minimum of two partners; however, an SRL may have up to fifty partners. The minimum fixed capital requirement is specified in the bylaws, and an SRL, like a SA, may operate under a flexible capital regime.
Both the partner's meeting and the management body are subject to the same requirements as the SA, although no surveillance examiner is required.
Due to the SRL's status as a pass-through entity for US tax purposes under the definition of "qualified entities" in Reg. 301.7701-3 of the US Internal Revenue Code, US investors regularly use this structure in Mexico.
SAPI (Sociedad Anónima Promocional de Inversión) is a limited-liability organization dedicated to the promotion of stock investments.
The SAPI is a kind of SA. Its primary advantage is the ability to apply the Securities Market Law's requirements to a publicly listed firm (Ley del Mercado de Valores). SAPIs, on the other hand, are not publicly listed firms that are regulated by the stock market.
A SAPI is distinguished from a normal SA by the following:
It is simpler to convert to a public entity, (ii) it allows for greater flexibility in executing shareholder agreements under the Securities Market Act's options, (iii) it requires lower percentages to exercise minority rights, and, most importantly, (iv) it enables the Securities Market Act's rules to be applied to a listed public entity.
Recent amendments to the Commercial Corporations General Law have aided in increasing the flexibility of SAs in this aspect, however there remain minor inconsistencies that make SAPIs a more flexible solution.
A SAPI may:
place limits on voting and transfer rights;
permit the issuance of shares with varying economic or voting rights (through a shareholders agreement or bylaws);
permit the issuance of shares with varying economic or voting rights (via a shareholders agreement or bylaws) (via a shareholders agreement or bylaws);
Establish processes for the business to buy its own shares if the shareholders are unable to agree on specific corporate decisions; and
permit the business to acquire its own shares.
Trusts:
The General Law on Negotiable Instruments and Credit Transactions (Ley General de Ttulos y Operaciones de Crédito) governs the most prevalent types of trusts.
Except for those goods and rights specified by law as personal to the owner, any good or right may be transferred to the trust's estate. The trustee is legally accountable for administering the trust's assets in accordance with the trust's goals. To enter into a trust arrangement, the settlor must have ownership rights to the trust assets. According to the legislation, this agreement may be signed by one or more settlors. The trustee must be an institution that is legally recognized, such as a bank or an insurance firm. Beneficiaries may be specified in the trust agreement or in a subsequent agreement; however, trustees may not be identified as beneficiaries unless the trust is established to satisfy the trustee's pending obligations under another arrangement.
The following trusts are prohibited:
Confidential trusts.
Multiple beneficiaries were listed in trusts to succeed one another upon their deaths.
Trusts often last longer than 50 years and involve a business entity or a non-profit organization as a beneficiary.
The following are the most often cited reasons for terminating a trust:
Its purpose has been fulfilled.
Its objective grew more difficult to accomplish.
When this privilege is granted in a trust, the settlor may revoke it.
It has cheated other parties.
Trusts that own real estate must be registered with the local Commercial Registry. Additionally, if the trust's assets include moveable property, the trust must be registered in the Sole Register of Moveable Properties.
The following are the most often used types of trusts:
Investment trusts are frequently comprised of private equity and an investment decision-making technical committee.
REITs are utilized to fund real estate development.
Shares trusts are founded when a settlor transfers to the trustee his or her shares in a corporation for a number of purposes, including voting rights.
Security trusts are a popular method of ensuring that credit agreements' payment obligations are honored (which prioritize the flow of payments that enters into the trust, including the payment of the principal obligation).
The actions to take while founding a legal entity are as follows:
Obtain a certificate from the Ministry of Economy authorizing the NewCo to use the chosen name. The certificate verifies that the requested domain name is available for use and that the NewCo is authorized to do so.
A notary public must witness the public instrument of incorporation (NewCo or its authorized representatives can do this).
To be represented at the incorporation, powers of attorney must be provided to the representative, legalized by a notary public, and apostilled under the Hague Convention protocol.
The duration of the bylaws design process will be dictated by the complexity of the shareholder negotiations.
Register the corporation's/corporate company's address as a public deed with the local Public Registry of Commerce (Registro Publico de Comercio). The registration procedure takes between 15 and 20 business days to complete.
To get a federal tax identification number, referred to as the Registro Federal de Contribuyentes ("RFC"), individuals must register with the Ministry of Finance and Public Credit's internal revenue agency (Secretara de Hacienda y Crédito Pblico). The RFC is necessary to do business, pay taxes, open bank accounts, invoice clients, and execute other functions. The registration procedure takes between 5 and 10 business days to complete.
If a company or firm has foreign investment in its capital stock, it is required to register with the Foreign Investment National Registry (Registro Nacional de Inversión Extranjera) and timely file notices in the following cases.
Employers must register with the Mexican Institute of Social Security (Instituto Mexicano del Seguro Social). The registration procedure takes between 5 and 10 business days to complete.
Fees and expenses associated with creating a SA or SRL normally range between MXN 50,000 and MXN 100,000, excluding legal fees.
It typically takes three to six weeks to incorporate a Mexican SA or SRL entirely, which involves opening bank accounts, issuing further powers of attorney, and selecting directors/managers.
To get the RFC, the foreign investor must also register with the Internal Revenue Service of the Ministry of Finance and Public Credit (Secretaria de Hacienda y Crédito Publico). During this registration process, the foreign investor must disclose the activities it intends to conduct in Mexico, as well as the knowledge that any proceeds from such operations will be taxed in Mexico. Once the RFC is obtained, the representative office or branch will be treated as a permanent establishment for tax purposes.
According to the Mexican Constitution and Foreign Investment Law, Mexican corporations and companies must include a specific clause in their bylaws stating that their foreign shareholders and partners are considered Mexican nationals with respect to their shares and equity quotas in the corporation or company, as well as the corporation or company's assets, rights, acquisitions, and interests in Mexico, waiving their foreign governments' protection. If this requirement is not satisfied, multinational investors risk having their whole investment confiscated by indigenous Mexicans.
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